Consumer Prices Ease In July

Economists Were Practically Giddy After Good News About Housing Starts And Jobless Claims.

August 17, 2001|By Delroy Alexander, Business reporter

A sharp decline in energy prices helped push the Consumer Price Index down 0.3 percent in July, the biggest drop in more than 15 years, the Labor Department said Thursday.

Combined with better-than-expected reports on housing starts and jobless claims, the data provided a welcome respite amid mounting concerns that the economy would remain moribund for months to come.

"This is all great economic news," said Mark Zandi, chief economist for Economy.com. "After all the gloom, which was getting thicker and thicker, there is a little break in the clouds and sunlight is poking through."

"The good side of the slower economy is that prices go up less," said Alexander Paris, chief economist at Chicago-based broker Barrington Research Associates. "Looking at the CPI, along with other numbers recently released, it's clear inflation is not a problem."

That reassured investors, who are looking for a seventh interest rate cut this year when Federal Reserve policymakers gather Tuesday. The Fed has cut rates from 6.5 percent to 3.75 percent; with the CPI now running at a 2.7 percent rate during the past 12 months, it could give the Fed more room to reduce its target without dropping inflation-adjusted rates close to zero.

"The Fed has all but guaranteed they will move rates. I expect a 0.25 percent cut, rather than a surprise 0.5 percent move some people were suggesting," said Wayne Ayers, chief economist at FleetBoston Financial.

July's decline in consumer prices was the first drop this year and the best showing since the 0.4 percent drop in April 1986.

A second report Thursday showed that the housing market continues to thrive.

The 2.8 percent rise in July housing starts, to an annual rate of 1.67 million, was the best showing in 17 months and stronger than Banc One Capital Markets Inc. expected. But its analysts warned clients that revised June start figures offset part of July's strong showing.

A Fed rate cut should also be more good news for the housing sector, Ayers said. Economists use the housing sector as an early indicator of how consumers react to interest rate cuts, looking closely to see whether they stimulate growth through more construction starts and mortgage initiations and refinancings.

Meanwhile, the Labor Department said first-time unemployment insurance claims fell by 8,000, to 380,000, in the week ending Aug. 11, the fourth decline in five weeks. The less-volatile four-week moving average fell 9,250, to 370,750, the lowest level since early March.